Russia Stuck at Junk as S&P, Moody’s Crush Hopes for Upgrade

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Russia will probably be saddled with a junk credit rating for two more years, Standard & Poor’s said, joining Moody’s Investors Service in dashing expectations by officials for a higher debt grade.

“It is unlikely that the ratings will be raised in the next 24 months,” Trevor Cullinan, sovereign analyst at S&P, said in an e-mailed response to questions on Tuesday. The nation’s negative outlook “indicates that we could downgrade Russia over the next 12 months if external and fiscal buffers deteriorate faster than we currently expect.”

While investors have piled into Russian assets, the rating outlook underscores the uphill struggle facing the country as it battles its first recession since 2009. The European Union on Monday prolonged sanctions against Russia by six months after fighting worsened between pro-Russian separatists and government troops in eastern Ukraine.

The assessment also runs counter to comments on Tuesday by Sergey Moiseev, head of the central bank’s financial stability department, who said he expected the rating to be restored in “the coming 12 months.” Speaking at the same event on Tuesday, First Deputy Governor Ksenia Yudaeva said Moiseev was voicing his personal opinion and not the central bank’s official position.

Officials’ Optimism

Deputy Finance Minister Maxim Oreshkin, a former chief economist for Russia at VTB Capital, said in April the country deserved an upgrade to reward authorities’ actions to steady the economic and financial situation.

With Russia locked in the worst confrontation since the Cold War with the U.S. and its allies, officials including Finance Minister Anton Siluanov have said that “political factors” contributed to decisions by rating companies.

Russia is rated BB+ by S&P after a one-step cut in January put it below investment level for the first time in a decade. It also holds the highest speculative grade from Moody’s, which said Friday that it’s “highly unlikely” to raise Russia above junk within the next 12 to 18 months.

Russian assets have rallied even as rating companies are taking a pause. The ruble is the best performer against the dollar this year among the world’s major currencies tracked by Bloomberg, with a 12 percent gain. The country’s local-currency debt handed investors 34 percent returns this year, the most in the Bloomberg Emerging Market Local Sovereign Index.

Attractive Market

The market for ruble government bonds, known as OFZs, will remain attractive for foreign investors despite the sovereign rating downgrades, according to the central bank’s Financial Stability Report released on Tuesday.

During its last review of Russia in April, S&P kept its foreign-currency rating unchanged as policy makers struggle to boost the economy and the financial system risks weakening because of a lack of external funding amid sanctions.

Russia is crafting a new budget for the next three years in “very difficult conditions” and fiscal policy must adjust to challenges stemming from sanctions and lower oil prices, Prime Minister Dmitry Medvedev said at a government meeting on Wednesday.

Gross domestic product will shrink 3.2 percent this year, compared with an earlier forecast for a contraction of as much as 4 percent, according to the central bank. The economy will expand 0.7 percent next year if oil prices recover to $70 a barrel by late 2016, it predicts.

“We could revise the outlook to stable if Russia’s financial stability and economic growth prospects were to improve,” S&P’s Cullinan said.

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